The Power of Dividend Investing: Procter & Gamble, Apple, and Lowe's

Investing in dividend stocks can be one of the most simple and effective ways to achieve superior returns over time. Not only that, but companies such as Procter & Gamble , Apple , and Lowe's show how dividends can be enormously valuable for investors when it comes to evaluating key aspects like a company's valuation, financial strength, or fundamental stability.

As opposed to earnings, which are sometimes subject to a considerable degree of accounting manipulation, cash does not lie. Especially when it comes to companies making consistently growing cash flow distributions throughout the decades, a business needs to generate reliable cash flows over time if it's going to deliver recurrent dividend payments.

Source: Procter & Gamble.

Procter & Gamble has paid uninterrupted dividends since its incorporation in 1890, which means 124 consecutive years. The company has increased distributions over the past 58 years in a row. This is an unequivocal sign of financial strength through all kinds of economic and financial environments.

These dividends don't come out of thin air, of course. The company is a market leader in several consumer household categories, doing business in more than 180 countries around the world and benefiting from tremendous brand power. P&G owns 25 brands that each generate more than $1 billion in global revenues.

P&G announced on April 7 a dividend increase from $0.6015 to $0.6436 per share quarterly, which represents a 7% hike. After this increase, it will be trading at a dividend yield in the area of 3.2%, which is quite high for the company from a historical perspective.

PG Dividend Yield (TTM) data. Source: YCharts.

Over the last 20 years, P&G has only traded at higher dividend yields during the financial crisis in 2009 and then again for a brief period in 2012. Investors analyzing a position in Procter & Gamble can clearly see how the company is offering an attractive entry point from the perspective of historical dividend yields.

Apple is one of the most popular and discussed companies in the market, but there is still plenty of disagreement regarding what level of growth in sales and earnings the company can generate in the coming years. The smartphone and tablet markets seem to be maturing, at least in developed countries, so product innovation will be a key factor to watch when it comes to sales growth.

Source: Apple.

On the other hand, there is little doubt that Apple will most likely continue to deliver substantial dividend growth in the years ahead. The company owns $147 billion in cash and liquid investments in its balance sheet, and it produced more than $22.6 billion in operating cash flows during the last quarter alone.

Capital expenditures consumed less than $2 billion during the quarter, so Apple generates enormous amounts of free cash flow available for dividend distribution on a recurrent basis.

Apple reinstated its dividends in 2012, and raised payments by 15% in 2013, so the company does not have the same kind of immaculate track record of dividend payments as P&G. The dividend yield is also more modest at 2.2%.

However, Apple has the fundamental strength to generate consistent dividend growth in the long term. Every dividend story needs to have a start, and Apple is most likely giving the first steps to building a long and fruitful trajectory of dividend increases.

Dividends can often be an important sign of management's ability to successfully sail through challenging economic times. Even in a cyclical industry like home-improvement retailers, Lowe's has proven to investors that it has what it takes to go through the ups and downs of the business cycle while rewarding shareholders with growing capital distributions.

Source: Lowe's.

The company owns more than 1,800 stores in the U.S., Canada, and Mexico, which makes it the second-largest player in the market behind Home Depot. Brand recognition and reputation are key competitive strengths in the industry, and Lowe's capitalizes on its scale to leverage its negotiating power with suppliers and obtain lower prices for its products.

Lowe's has paid uninterrupted dividends since 1961, and the company has raised payments over the last 51 consecutive years, including a considerable increase of 12.5% announced last year, from $0.16 to $0.18 per share quarterly.

The dividend yield is not very impressive at 1.6%, but the payout ratio is comfortably low in the area of 33% of earnings. In combination with the company's rock-solid trajectory of dividend payments, this means investors have valid reasons to expect growing distributions from Lowe's over years to come.

Dividend investing can be a powerful strategy for superior returns, not only due to the income that dividends generate but also because cash flow distributions say a lot about a company and its fundamental strength. Procter & Gamble, Apple, and Lowe's are three remarkable examples to consider from that point of view.